“For every home built 2014/5 £60,000 went to landowner”

Thomas Aubrey of the Centre for Progressive Policy:

“Our system favours landlords over communities. The PM must side with the many, not the few.

Theresa May is right. Britain’s housing market is broken and needs fixing. Homelessness and rough sleeping are rising and owner-occupation levels for the young have collapsed because homes have become unaffordable.

The average private rent in London accounts for more than a third of household income. The bill for housing benefit has risen eight-fold since the early 1980s after inflation is taken into account. House building has risen since the lows reached during the financial crisis of a decade ago but needs to almost double to hit the government’s target of 300,000 new homes a year by the middle of the next decade.

Yes, the housing market is broken all right and for the Conservatives, a party that sees itself as the party of the homeowner, it is a serious political headache.

A crisis has been brewing for decades – and left unattended the problem can only get worse. Britain has a rising population and the trend is for smaller households, both of which mean demand for housing will keep on rising. The weak growth figures for the first three months of 2018 will keep borrowing costs on hold for now but sooner or later the Bank of England will raise interest rates. That will make it still harder for people in their 20s to get a foot on the housing ladder.

Yet sketching out the problem is one thing. Coming up with solutions is trickier.

Replace a regressive council tax with a land value tax? Labour is thinking about a LVT but there is no chance the Conservatives will introduce what they have dubbed a “garden tax” that would hit millions.

How about giving some of the anonymous farmland in the green belt over to housing development? The thin end of a wedge that will result in the south-east being turned into one big urban sprawl.

Make prime residences eligible for capital gains tax? Are you kidding? Politicians know that Britain’s housing market is broken but mess with it at their peril.

The problem is so big, however, that changes have to come. London’s mayor, Sadiq Khan, wants to increase the supply of lower-cost homes in the capital, so under City Hall guidelines private development proposals where affordable units make up at least 35% of the total will be fast-tracked through the planning process. Under 35%, and developers can expect a much tougher time.
But as Daniel Bentley argues in a new pamphlet for the thinktank Civitas, the problem goes deeper than the planning system. Forcing councils to grant more planning permissions in high-demand areas doesn’t guarantee that the supply of new homes will markedly increase.

The reason for that, Bentley says, goes back to the 1961 Land Compensation Act passed by Harold Macmillan’s government. This enshrined in law the right of landowners, in the event of compulsory purchase, to be reimbursed not only for the value of their land as it stood but for its potential value if it were used for something else in the future.

A system so heavily weighted in favour of landowners had two consequences. First, it provided them with an incentive to wait, often for years, before selling their land for development because they would get a higher price. Second, house-builders had to recoup the costs of buying the land and did so by building more expensive properties that were drip-fed into the market to keep selling prices high.

If the aim is to build more affordable homes, this makes no sense. A site with planning permission for housing is worth more than a brownfield industrial site and 100 times more than agricultural land. Research by Thomas Aubrey of the Centre for Progressive Policy found that landowners made windfall profits of more than £9bn in 2014-15 on the sale of land. That meant for every home built that year, an average of £60,000 went to the landowner.

Bentley says the entitlement of landowners to this “hope value”, the prospect that it will be worth a lot more if used for something else, means public authorities are powerless to enforce development priorities that are in the interests of the community.

“This was not always the case. The new towns that were initiated before the 1961 act, and much of the local-authority output of the late 1940s and 1950s, was underpinned by a land values policy that meant landowners were compensated at values reflecting the existing use of the site,” he said.
“This meant land for new homes could be acquired at or close to its much lower agricultural or industrial use values. It also doused speculation and prevented the withholding of land.”

Reforming the 1961 act so that public-sector bodies can purchase land at less than its prospective residential use value makes sense because it would enable developers to get hold of land more cheaply and so build more affordable homes. Nor would it be an especially controversial move politically.

Judging by their 2017 manifestos, Labour and the Conservatives think the current system is weighted too heavily in favour of landowners, who see the value of their holdings increase not through their own efforts but through those of others.

Adam Smith and David Ricardo, darlings of the free-market right were critical of the “unearned increment” that landowners enjoyed. So was Henry George, who the left laud for coming up with the LVT.

May should seek bipartisan support for a rethink of the 1961 act. Sure, Conservative-supporting landowners would object but if the prime minister is to make good on her pledge to fix the housing market she has to side with the many not the few.”

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2 thoughts on ““For every home built 2014/5 £60,000 went to landowner””

P.S. If the government legislates to restrict the added-value that landowners get, do you think that house prices are going to drop? House prices are also subject to the economic law of supply and demand, so whilst big developers continue to have a grip on land supply and hence house supply, house prices will not drop regardless of price premiums on development land – all that restricting the added-value paid to landowners will do will be to increase the profit margins of developers still further.

P.P.S. If you are a land owner, getting PP for your land is not cheap – landowners generally need to invest several £m to get a significant amount of development land into PP, and achieving that is not guaranteed – in other words there is some risk involved, and land owners deserve some benefit if their risk pans out.

Any economist will tell you that it is better to legislate to change the shape of a market to reduce market-prices e.g. by making it too expensive to land bank land with PP, than it is to distort it by enabling public sector bodies to buy land at below market prices and sell it on at market prices as all that does is transfer the profit to someone else not change the basic economics.

Development land is worth £60,000 extra per house because of the law of supply and demand – if you want to buy development land when it is in short supply then you need to pay more.

There are two possible reasons that development land is in short supply:

a. Because it is very difficult to get planning permission (PP) for significant developments – it can take 20+ years to achieve and cost several £m; and

b. Because the biggest developers buy up development land with PP as an investment and land-bank it.

The problem is that solving a. without solving b. simply results in ever increasing land-banking. Since the developers have already booked the increase in land values on gaining PP into their accounts, they cannot afford to see land prices decrease as it would create huge accounting losses for them – imagine how much of a reduction the directors bonuses would be hit by. So developers continue to snap up land and bank it, and book the land price increases as profits to boost the directors bonuses.

The Conservative Government has allowed developers to define Government policy on development (a bit like allowing poachers to define the law on poaching), and they have loosened planning rules to make getting PP easier to the detriment of local communities – but because of b. it has only made the problems worse (whilst allowing developers to make obscene profits and pay obscene bonuses to their directors).

Until the Government legislates to unlock the land banks owned by big developers and make that land available for small developers at reasonable prices this will continue.

And when the Conservative Party is funded by a few ultra-rich individuals and their corporations many of whom are the big developers that benefit from the current approach (and for whom the donations are a tiny proportion of the money they gain from current policies) that will never happen under a Conservative Government.